A Bet Or A Prediction? Intrade's Purpose Is Debated

Ireland-based Intrade lets users bet money on all manner of predictions — like if a particular film will win an Oscar. The site is ceasing operations in the U.S.

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Originally published on November 29, 2012 5:02 pm

The popular website Intrade allows its users to bet on the odds of almost anything — like whether Syrian President Bashar al-Assad will get ousted by a certain date, or whether the movie Argo will win best picture at the Oscars.

This week, Ireland-based Intrade announced that U.S. users will have to unwind their bets and shut down their accounts by the end of the year. That's after the Commodity Futures Trading Commission sued Intrade for operating an unregistered exchange.

Transactions on the site have long resided in a gray area in the U.S., with little clarity as to whether they represent gambling, futures trading or something else that should not be regulated — leaving some questioning the legal basis for cracking down on so-called "prediction markets."

'More Accurate Than Pundits'

"Conceptually, to an economist, there's not a difference between betting and trading — apart from the fact that one sounds more polite than the other," says Justin Wolfers, who grew up in Australia working for bookies taking bets.

Now a University of Michigan professor who's studied Intrade, Wolfers says the site is not just a venue for winning and losing money. It also generates news as a byproduct, he says. That is, the odds on Intrade are almost always right.

"It tends to be more accurate than pundits, it tends to be more accurate than polls, and in the past it's even more accurate than very sophisticated poll-watchers like The New York Times'Nate Silver at FiveThirtyEight.com," Wolfers says.

To use Intrade, members place bets on yes-or-no questions. Much like a stock, the price of placing a bet fluctuates based on demand. And when the outcome is determined, the payout is either $10 or nothing. If you win, your profit is that $10, minus the price you paid to place your bet.

According to Thomas Bell, a professor at Chapman Law School in California, the CFTC considers those transactions enough like pork belly futures — which fall under the commission's authority — to be shut down.

'Terrible Uncertainty'

Bell says prediction markets that allow trading on current events are still a very tiny — and very new — segment that occupies a gray area of the law.

The CFTC's complaint equates predictions with regulated options trades — the kind of hedges farmers use on crops. It also charged Intrade's parent company with violating a cease-and-desist order. Neither Intrade nor the CFTC commented for this story.

But to Bell, prediction markets are neither games of chance, nor economically significant markets. He says it's a matter of free speech. "It's important to let people put money behind their claims, because it incentivizes honesty," he says. "And it also incentivizes people to go out and find the truth. And those are both great things."

Wall Street analyst Lawrence Lau agrees. "It's not a gamble because it's not luck that affects the outcome," he says. Lau spends 10 hours a week on Intrade, researching probabilities. He says he's made 60 percent returns on his money in 2012, which he plans to use for graduate school.

Lau says the government's suit is ridiculous. "I didn't really believe it when I first saw it," he says. "But when I looked into it I thought, 'This is a waste of the taxpayers' time and money.' "

"I honestly think that is part of the attraction for a lot of Intrade users," he says. "They feel a sense of power. ... They may be able to move the price on things they may not even know about."

Meanwhile, Intrade posted on its website it hopes to eventually announce plans to operate legally in the U.S. But without specifics, legal experts say, it's hard to know whether that prediction is a safe bet.

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Transcript

ROBERT SIEGEL, HOST:

Moving on now to a story placing bets online. This week, the website Intrade, based in Ireland, said all American users must shut down their accounts by the end of the year. Intrade allows people to bet on, among other things, the success of movies or political candidates. And for years, it hasn't been clear whether this kind of betting should be regulated. Intrade's decision this week comes after it got sued by the Commodity Futures Trading Commission. The U.S. regulator says Intrade is operating an unregistered exchange.

But as NPR's Yuki Noguchi Reports, some are questioning the legal basis for that suit.

YUKI NOGUCHI, BYLINE: Justin Wolfers grew up in Australia working for bookies taking bets. Now, he's an economics professor at the University of Michigan who has studied Intrade.

JUSTIN WOLFERS: Conceptually, to an economist, there's not a big difference between betting and trading, apart from the fact that one sounds more polite than the other.

NOGUCHI: But Intrade isn't just a site for winning and losing money. Wolfers said it also generates information as a by-product. That is, the odds on Intrade are almost always right.

WOLFERS: It tends to be more accurate than pundits. It tends to be more accurate than polls. And in the past, it's even more accurate than very sophisticated poll watchers like The New York Time's Nate Silver at fivethirtyeight.com.

NOGUCHI: The way it works is Intrade users place bets on yes-or-no questions. Current bets include whether Syrian President Bashar al-Assad will get ousted by the end of the year or whether the movie "Argo" will win Best Picture.

The price of placing a bet fluctuates, based on demand, similar to stocks. When the outcome is determined, the payout is either $10 or nothing. If you win, profits are that $10 minus the price you paid to place your bet.

THOMAS BELL: That to the CFTC is enough like pork belly futures. And it should fall under the CFTC's authority, and they should shut it down.

NOGUCHI: That is Thomas Bell, a law professor at Chapman Law School. He says the predictions market for current events is still a very tiny and very new market that occupies a gray area of the law.

NOGUCHI: The CFTC's complaint equates predictions with options trades, the kind of regulated hedges farmers use for crops. It also charged Intrade's parent company with violating a cease and desist order. Neither Intrade nor the CFTC commented for this story.

But to Bell, prediction markets are neither games of chance nor, he says, are they economically significant. He says regulating them curbs free speech.

BELL: It's important to let people put money behind their claims because it incentivizes honesty. And it also incentivizes people to go out and find the truth. Those are both great things.

NOGUCHI: Lawrence Lau agrees.

LAWRENCE LAU: It's not a gamble because it's not luck that affects the outcome.

NOGUCHI: Lau is a Wall Street analyst who spends 10 hours a week on Intrade. Using an algorithm to determine box-office performance of movies, he says he's made 60 percent returns on his money this year, profits he plans to use for graduate school. Lau called the government's suit ridiculous.

LAU: I didn't really believe it when I first saw it. But I looked into it and I'm just thinking, you know, this is a waste of the taxpayer's time and money.

NOGUCHI: Elsewhere on Wall Street, Jason Ruspini is an executive at a hedge fund firm and former Intrade user who embraced the government's action.

JASON RUSPINI: These things really do need to be regulated. And I'm sort of happy that the CFTC is cracking down because without regulation there's no accountability.

RUSPINI: I honestly think that is part of the attraction for a lot of Intrade users is that they feel a sense of power. You know, they're able to move the price on things they may not even know about.

NOGUCHI: Meanwhile, Intrade posted on its website it hopes to eventually announce plans for legal operation in the U.S. But without specifics, legal experts say it's hard to know whether that prediction is a safe bet.